Following President Trump’s election, many predict that inflation will remain a concern, particularly in service prices.
The situation in the US economy is buoyant yet overall inflation in the euro area is expected to remain slightly above 2% in 2025, with Central and Eastern European countries, most likely to face higher inflation, driven by factors such as wage pressures. As inflation rates rose, central banks faced the challenge of balancing inflation control with economic growth. Higher interest rates, aimed at curbing inflation, can slow down economic growth by increasing borrowing costs for consumers and businesses.
The good news depends on an honourable cease fire agreement in Ukraine. Such a deal predicts ample opportunities for stronger growth in Europe. As such, opportunities are varied but may include faster decline in services inflation and stable core goods prices could boost household spending and allow central banks to cut rates, thereby stimulating growth. Households could spend excess savings from the pandemic, boosting economic activity.
Tight labour markets could drive investments in automation, AI and robotics, increasing productivity and growth. Higher immigration could ease labour shortages and support long-term growth. As stated earlier, the economic landscape in Europe has been influenced by various factors since Donald Trump’s election in November 2024, particularly in relation to inflation trends and international pressures on growth.
For example, the automotive sector is significantly impacted by Trump’s trade policies, particularly the threat of tariffs on imported vehicles and auto parts. The Trump administration launched an investigation into whether imported cars posed a national security threat, which raised concerns among European automakers. Major European car manufacturers, such as Volkswagen, BMW and Daimler, faced uncertainty regarding their operations in the US and potential tariffs, which could affect pricing and competitiveness.
The pharmaceutical and chemical sectors will also be impacted by trade policies, as tariffs on raw materials and finished products affected production costs and market access. European companies that export to the US will certainly face challenges in maintaining competitiveness due to potentially increased tariffs. Trump’s election and subsequent policies, include trade tariffs and a more confrontational stance on international relations. This has created uncertainty in global markets. This can lead to inflationary pressures as businesses adjust to changing trade dynamics and costs. The imposition of tariffs, particularly on goods from China, will cause ripple effects on global supply chains. European companies that rely on imports from the US or China face increased costs, which could contribute to inflation.
Additionally, retaliatory tariffs from other countries affected European exports, potentially leading to higher prices domestically. Global energy prices, particularly natural gas and oil are on a upward trajectory. Not to forget geopolitical tensions, including those exacerbated by US foreign policy, can lead to fluctuations in energy prices. As European economies recovered from the pandemic, inflation rates rose significantly in 2021 and 2022.
Factors included rising energy costs, supply chain bottlenecks and increased consumer demand. Central banks, including the European Central Bank (ECB), faced challenges in managing inflation while supporting economic growth. The uncertainty surrounding Trump’s trade policies and their impact on global trade can in future contribute to a slowdown in economic growth in Europe. The initial optimism, following Trump’s election, was tempered by concerns over potential trade wars and economic isolationism. “The security architecture that Europe has relied on NATO for generations is gone and is not coming back,” writes Anders Fogh Rasmussen, a former secretary-general of NATO.
Trump’s foreign policy approach, which included a more transactional stance and questioning of traditional alliances, has created geopolitical tensions that could impact European growth. Uncertainty in international relations can affect trade, investment and overall economic stability. Looking ahead, the euro area is expected to see a modest economic recovery in 2025, with growth forecasted to rise from 0.7% in 2024 to 1.3% in 2025 and 1.8% in 2026, before slowing to 1.4% in 2027. Malta’s GDP growth in 2025 is expected at 4%, the highest among European countries. It is pure kudos to read that Malta enjoys close to a full employment economy; one where the unemployment rate equals the non-accelerating inflation rate of unemployment (NAIRU), no cyclical unemployment exists, and GDP is at its potential high.
Twelve years ago on the landslide election of a Socialist party, there were nearly 46,000 persons employed in the public sector, either on a full- or part-time basis ‒ about a quarter of the total workforce of the Maltese economy. By 2023, the share had fallen to less than a fifth of the workforce, even though the number of employed had risen to just over 55,000.
Employment growth is anticipated to slow across the euro area due to weaker labour demand and demographic pressures, while unemployment is expected to stabilise at 2024 levels. Important to observe how, nominal wage growth is projected to decline in 2025, though it will remain above pre-pandemic levels due to ongoing labour market tightness.
We have also had a significant increase in the labour participation rate of women, thanks to free childcare (costing circa €50m annually), an in-work benefit scheme, and a social benefits tapering scheme, parental and maternal paid leave; these together increased labour supply by around 11,500 workers.
On the international stage, it is evident that Trump’s election has contributed to significant inflationary pressures in Europe, driven by global economic uncertainty and trade policies. These inflation trends have, in turn, created challenges for economic growth, as businesses navigate a complex landscape of rising costs, investment hesitancy and labour market issues. Undoubtedly, the interplay between inflation and growth remains a critical concern for policymakers in Europe as they seek to foster stability and recovery in the post-pandemic era.
The impact was felt across industries, from manufacturing and agriculture to aerospace and consumer goods, highlighting the interconnectedness of global trade and the potential consequences of unilateral trade actions. The retaliatory measures to be taken by the EU in response to US tariffs further complicates the trade landscape, affecting both sides of the Atlantic. The anticipated US-China trade war shall also significantly influence European trade policies by creating a more complex and uncertain trade environment.
In response, the EU sought to strengthen its trade relationships with China, emphasise multilateralism and pursue new trade agreements. The penny dropped that both sides must address trade imbalances and jettison unfair practices.
In conclusion, post-Trump, these trade conflicts underscored the interconnectedness of global trade and pushed Europe to adjust its strategies to navigate the evolving landscape effectively.
George M. Mangion is a senior partner at PKF Malta
